Distressed PSUs’ stake sales needed

So far the government has divested stakes in public sector undertakings (PSUs) like Cochin Shipyard, Housing and Urban Development Corporation (Hudco) and insurance firms like General Insurance Corporation (GIC) and New India Assurance, etc.

It intends to divest further in many companies, including Hindustan Petroleum Corporation Ltd (HPCL). In addition, the government might mobilise close to Rs 10,000 crore from Bharat 22 ETF, which contains several PSUs.

The most common thing about these divestments is that a majority of them are largely decent profit-making PSUs.

However, in one area where the government could make significant impact for the PSUs concerned or for the fiscal balance of the government itself is the mid-sized PSUs, which are stressed (loss-making or perennially sick) or which are making meagre profits (also pay very poor dividend), but trade at exorbitant valuations on the markets.

Fortunately, the current bull market, which is mother of all previous bull markets in terms of aggregate market cap build up, has rewarded even such stressed and sick PSUs.

The market cap of some of these companies has moved up 100% to nearly 500% from the 52-week low despite many of them not being able to make substantial profits. Coincidently, many of them have low floating stocks.

A metal PSU trades even at 90 PE while comparable peers in the private sector trade at less than 20 PEs.

A machine-making PSU, despite huge losses in the last three years, trades at 14 times its annual sales. PSUs engaged in trading business trade at over 35 to 80 times their earnings.

One of these trading PSUs saw its market cap going up as high as Rs 150,000 crore about 10 years ago, only to fall 95% after four years.

A technology PSU, whose operating profit is less than the grants-in-aid it receives from the government, has seen its stock go up almost five-fold in the last 52-weeks.

Another PSU engaged in service business trades at EV to Ebittda (Enterprise Value to Earnings Before Interest, Tax, Depreciation & Amortization) of over 115, a rare phenomenon in this market.

This company saw its market cap falling by 85% in 2014 from its peak in 2013 and again risen more than five-fold now from its 2014 low.

These PSU stocks are extremely volatile on both downsides and upsides in the markets.

Unfortunately, such huge run-up in their stock prices helped neither the companies concerned nor the government.

Only the “smart investors” end up with substantial gains capitalising on the volatility in the stock prices of these PSUs.

A dynamic approach of the government (a dominant stakeholder of these companies) in terms of periodic divestment of stakes or rights issues at attractive discounts at the peak of the valuations by the companies would go a long way in strengthening the fiscal balance of the government or balance sheets of those concerned PSUs.

It would also help in avoiding extreme volatility in these stock prices and thereby, minimise the wealth destruction for the gullible retail investors.

The writer is founder and managing director, Equinomics Research and Advisory